Question for Eurozone finance ministers

Today in the lower house of the Irish parliament, Minister for Finance Brian Lenihan repeated a statement that he made on Irish radio yesterday concerning European endorsement of the Irish government’s policies in relation to the banking crisis.  Specifically, he told the house

The fact is that every finance minister in Europe [Eurozone] indicated the other evening that the [blanket bank liability] guarantee was the correct policy at the time [September 2008].

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The basis is this paragraph from the Eurogroup statement following their Monday meeeting

We welcome the measures taken to date by Ireland to deal with issues in its banking sector, via guarantees, recapitalisation and asset segregation. These measures have helped to support the Irish banking sector at a time of great dislocation. However, market conditions have not normalised and pressures remain, giving rise to concerns that further reforms and stabilisation measures may be appropriate.

Since this statement is like all such statements written to be vague enough to encompass what all the parties want it to mean, it’s worth being more specific.  So: do the finance ministers support a policy of open-ended liability guarantees to insolvent banks regardless of their size?  Because that’s what Ireland did in 2008.  And the minister is now using the claimed endorsement of his European colleagues as a basis for being angry at the opposition for even having forced a vote on the extension of the revamped guarantee yesterday.

7 thoughts on “Question for Eurozone finance ministers

  1. BBC – Peston’s Picks: Why Ireland can’t afford to punish reckless lenders to its banks

    “Total foreign bank exposure to Ireland’s economy is $844bn, or five times the value of Ireland’s GDP or economic output. Of that, German and UK banks are Ireland’s biggest creditors, with €206bn and €224bn of exposure respectively.

    To put it another way, German and British banks on their own have each extended credit to Ireland greater than Irish GDP.”

    The other finance ministers were covering for their own domestic constituents, in speaking approvingly of Lenihan’s measures. It seems to me that Ireland’s leaders have been snookered.

    The question that Irish citizens should be asking themselves is why they should endure draconian austerity measures in order to make whole creditors that lent recklessly on projects in Ireland. The approach of political and financial leadership in Europe and the US thus far has been that taxpayers will bear the burden of poor investments in order to make whole banks and their depositors. In other words, one would expect that as Ireland’s foreign bank exposures come due the government will issue sovereign debt to cover those exposures; as the individual debtors will not be able to repay. The sovereign debt would then require significant increased taxation for the foreseeable future to have a chance of being repaid.

    The pressure on Ireland to eliminate its corporate taxation advantage is not in that country’s interest either. If the tax rates are raised, jobs will disappear making it even more difficult for Irish taxpayers to make good on the guarantees their leaders have recklessly made.

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  4. There is large uncertaity how markets will value the steps by Irish government, engaging new liabilities of size of 100% of GDP.

    For instance, Latvia accepted only 25% of GDP as new debt to bailout banks, however, the sole existence of preferred debt and the perspective of falling income have unsecured markets to the extent that access to global bond market has not returned.

    At the moment there is the paradoxical situation for Latvia – short-term interest for overnight is at 0,5% (lower than EUR), but access to global bond market is blocked.

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  7. The general rule is simple – what the powerful wants the powerful gets. This includes massive social engineering to increase their power and control and weaken their class adversaries, and that they take every penny they claim. This is the guiding principle.

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